Chapter 2 PDF

Slide 2.
Chapter 2
Internationalisation process
Wall, Minocha and Rees, International Business, 3rd Edition, © Pearson Education Limited 2010
Slide 2.2
Reasons firms internationalise
Slide 2.3
Internationalisation methods (1)
• Export based
– Direct exporting
– Indirect exporting
• Non-equity based
– Licensing
– Franchising
• Equity based
– Joint ventures
– Foreign direct investment (fdi)
– Consortia, Keiretsus and Chaebols.
Slide 2.4
Internationalisation methods (2)
4
Slide 2.5
Export-based internationalisation (1)
• Indirect exporting: firm operates through

intermediaries
– Export house
– Confirming house
– Buying house
– ‘piggybacking’; benefits to ‘rider’ and ‘carrier’
• Advantages: less costly, quicker
• Disadvantages: information/experience is
‘second hand’.
Slide 2.6
Export-based internationalisation (2)

• Direct exporting: firm engages directly with
overseas markets.
• Advantages:
– Allows the exporter to closely monitor
developments and competition in the host
market
– Promotes interaction between producer and
end-user
– Involves long-term commitments, such as
providing after-sales services to encourage
repeat purchases.
• Disadvantages: higher resource cost (more
expensive), takes time to establish etc.
Slide 2.7
Export Processing Zones (EPZs)
• Provide incentives for direct exporting

activities: e.g. Lower or zero taxes on profits
and/or imported components, government
subsidies, better infrastructures, less
restrictive regulations, etc.
• Widely used by countries to encourage inward
fdi specifically targeted towards increasing
direct exports.
Slide 2.8
Non-equity based
internationalisation
• Licensing
• Patents
• Franchising
• Management contracting, etc.
Slide 2.9
Licensing
• Permission granted by the proprietary owner

to a foreign concern (the licensee) in the form
of a contract that would otherwise be legally
forbidden (e.g. Under patent protection).
• Licensors benefit by access to overseas
markets (via licensees) with little or no
investment or ‘local knowledge’.
• Licensees benefit by access to technologies
or products (brands) otherwise unavailable.
Slide 2.10
Franchising
• Franchisee purchases the right to undertake

business activity using the franchiser’s name
or trademark rather than any patented
technology.
• First-generation franchising: franchiser grants
considerable autonomy to franchisee.
• Second-generation franchising: franchiser
grants little or no autonomy to franchisee.
Slide 2.11
Franchiser: advantages/disadvantages
• Advantages for the franchiser: overseas

expansion can be much less expensive and
any local adaptations can (with agreement)
be made by those well acquainted with
cultural issues in that country.
• Disadvantages for the franchiser : possible
conflict with the franchisee for not following
regulations and agreements as well as a
threat that the franchisee may opt to ‘go it
alone’ in the future and thus become a direct
competitor.
Slide 2.12
Franchisee: advantages/disadvantages
• Advantages for the franchisee

– Buy into an existing brand and receive support
from the franchiser in terms of marketing, training
and starting up.
– When customers walk into a McDonald’s
restaurant, they know exactly what to expect.
• Disadvantages for the franchisee
– Restrictions on what they can and can’t do. E.g.
McDonald’s have very strict regulations
concerning marketing, pricing, training etc.
– A franchisee cannot simply change the staff
uniform, alter prices or vary opening hours as the
company operates a standardised approach to
doing business.
Slide 2.13
Other contractual modes of

• Management contracting
• Technical service agreements
• Contract-based partnerships.
Slide 2.14
Equity-based methods of
• Joint ventures
• Alliances
• Consortia: e.g. Keiretsu (Japan), Chaebols
(Korea).
Slide 2.15
Joint ventures
• Create a new identity in which both the initiating

partners take active roles in formulating strategy and
making decisions.
• Advantages
– Share and lower the costs of high-risk, technology-
intensive development projects
– Gain economies of scale and scope in value-adding
activities that can only be justified on a global basis
– Secure access to a partner’s technology, its
accumulated learning, proprietary processes or
protected market position
– Create a basis for more effective future competition in
the sector.
Slide 2.16
Specialised joint ventures
• Each partner brings a specific and different

competency – e.g. one produces, the other
markets/distributes.
• Advantages: share risks, learn about each
partner’s knowledge/skills and
marketing/distribution methods, etc.
• Disadvantages: partner learns from you and
may now compete in your core competency;
high co-ordination costs; etc.
Slide 2.17
Shared value-added joint ventures
• Both partners contribute to the same function, i.e.

bring a similar competency.
• Advantages: benefit from increased economies of
scale (size), economies of scope (product mix),
economies of experience.
• Disadvantages: partner finds it easier to learn and
copy when familiar with same functional area;
higher exit costs size increases in
production/administration have already taken
place.
Slide 2.18
Critical success factors for joint

ventures
• Take time to assess the partners.
• Understand that collaboration is a distinct form
of competition.
• Learn from partners while limiting unintended
information flows.
• Establish specific rules and requirements for
joint venture performance at the outset.
Slide 2.19
Alliances (1)
• Collaborative relationship which is much less

structured than a joint venture or acquisition.
• Four ‘I’s’ determine whether to have an
alliance rather than a joint venture or
acquisition
– Infeasibility
– Information asymmetry
– Investment in options
– Indigestibility.
Slide 2.20
Alliances (2)
Figure 2.1 The four ‘Is’ of collaboration

Source: Based on Reuer (1999)
Slide 2.21
Infeasibility and information asymmetry
• Alliance preferred when:

– ‘infeasibility’ exists for acquisitions/JVs, e.g.
legal restrictions prevent them, but not
alliances.
– ‘information asymmetry’ exists for acquisitions/
JVs, e.g. difficult to carry out the due diligence
needed for them, but not alliances.
Slide 2.22
Investment in options and

indigestibility
• Alliances preferred when:
– ‘Investment in call options’ is likely to be
attractive given the high degree of uncertainty
that exists for an acquisition or JV.
– ‘Indigestibility’ is strongly associated with the
proposed acquisition or JV being assimilated
within the existing organisational structures.
Slide 2.23
Consortia (1)
• These involve the bringing together of

different companies to pool resources into an
integrative organisational design.
• Some overlap with ‘alliances’ but consortia
usually occur across many firms and sectors.
Slide 2.24
Consortia (2)
• Keiretsu: Japanese consortia where 20/25

different companies integrate through
interlocking directorates, common bank
holdings, close personal ties, etc.
• Chaebols: South Korean consortia and have
similarities with Japanese keiretsu.
Slide 2.25
Foreign direct investment (fdi)
• International investment in ‘real’ items, e.g.

land , buildings, equipment, organisation
• Can take various forms:
– ‘Greenfield investment’, whereby an entirely
new foreign operation is established
– Merger with, or acquisition of an existing
organisation
• Advantages/disadvantages of mergers
acquisitions – explored further in Ch. 7.
Slide 2.26
Why invest abroad?
• Supply factors
– Production costs
– Distribution costs
– Availability of natural resources
– Access to key technology
– Incentive schemes to reduce costs.
Slide 2.27
Production costs
Differences in relative unit labour cost
Total labour costs ($ per Total labour costs ($ per Labour productivity
Country hour) hour Index: UK = 100) (Index UK = 100)
Mexico 2.6 21.8 35.2
Korea 13.6 20.9 48.4
France 24.6 95.7 118.1
UK 25.7 100.0 100.0
Japan 21.8 84.8 82.4
US 23.7 92.2 116.2
Germany 33.0 128.4 109.7
Slide 2.28
Production costs
Differences in tax rates
Economy Individual tax rate (%) Corporate tax rate (%)
Hong Kong (China) 16 17.5
Kyrgyzstan 10 10
Latvia 25 15
Romania 16 16
Russian Federation 13 24
Slovakia 19 19
Slide 2.29
Other supply factors and fdi
• Distribution costs: e.g. greater the bulk/weight

of product, more important it is to invest in
producing/assembling close to the final market
to reduce transport costs.
• Availability of natural resources: e.g. oil,
natural gas, mineral deposits, etc. stimulate
foreign investment.
• Access to key technology: e.g. investing in
overseas expertise, as in Science Parks, etc.
Slide 2.30
Why invest abroad?
• Demand factors
– Market-oriented multinationals
– Saturation of home market
– Demand from business customers now abroad
– Avoidance of trade barriers
– Demand from overseas governments for
inward fdi (incentive schemes)
– Strategic issues: e.g. matching rivals; seeking
more ‘local’ responsiveness.
Slide 2.31
Market-oriented multinationals
Figure 2.2 Evolution of a market-orientated multinational

Source: Adapted from Healey (2007)
Slide 2.32
Other demand factors
• Saturation of home market: e.g. Beer drinking

is much smaller percentage of Chinese/Indian
than EU markets.
• Demand from business customers now
abroad: e.g. Japanese component suppliers
moving to EU to support Japanese car
companies moving to EU.
Slide 2.33
‘Political’ reasons for fdi
• Avoidance of trade barriers: e.g. Producing

inside EU avoids the Common External Tariff
on imported industrial products.
• Economic development incentives: e.g.
Government provision of low or zero taxes,
subsidised infrastructure, lighter regulation,
etc.
Slide 2.34
Other demand-related reasons for

fdi
• Motivation of the organisation
– Market seeking
– Efficiency seeking
– Resource seeking
• ‘Bandwagon’ effect: following rivals fdi
• International product life cycle: see below!
Slide 2.35
Theories of internationalisation
• Ownership – specific advantages

• Location – specific advantages
• Internalisation
• Eclectic theory
• Sequential theory
• Simultaneous theory
• Network theory
• International product life cycle (IPLC).
Slide 2.36
Ownership-specific advantages
• Here the focus is on the assets owned by the

firm which might give it a competitive edge
vis-à-vis other firms operating in overseas
markets.
• Such ownership-specific advantages might
include superior technology, a well-known
brand name, economies of scale or scope,
managerial or organisational skills, etc.
Slide 2.37
Location-specific advantages
• These theories have mainly sought to answer

the ‘where’ question involving MNE activity
outside the home country as well as the ‘why’.
• The availability and price of natural and
human resources in overseas territories, of
transport and communications infrastructure,
market-size characteristics and other
locational attributes are the focus of attempts
by these theories to explain the
internationalisation process.
Slide 2.38
Internalisation
• Here the focus is on the costs of entering into a

transaction, e.g. the costs of negotiating,
monitoring and enforcing a contract.
• The firm decides whether it is cheaper to own and
operate a plant or establishment overseas or to
contract with a foreign firm to operate on its
behalf through a franchise, licensing or supply
agreement.
• Foreign direct investment is more likely to occur
(i.e. the process to be internalised) when the
costs of negotiating, monitoring and enforcing a
contract with a second firm are high.
Slide 2.39
Eclectic theory
• John Dunning (1993) concluded that companies will

only become involved in overseas investment and
production (fdi) when the following conditions are all
satisfied:
– Companies possess an ‘ownership-specific’ advantage
over firms in the host country
– It must be more profitable for the multinational to exploit
its ownership-specific advantages in an overseas
market than in its domestic market. In other words,
there must additionally exist ‘location-specific’ factors
which favour overseas production
– These advantages are best exploited by the firm itself,
rather than by selling them to foreign firms.
Slide 2.40
Sequential theory (1)
• Sometimes called the ‘Uppsala model’ as Johanson

and Widersheim-Paul examined the
internationalisation of Swedish firms.
• They found a regular process of gradual change
involving the firm moving sequentially through four
discrete stages:
– Intermittent exports
– Exports via agents
– Overseas sales via knowledge agreements with local
firms, for example by licensing or franchising
– Foreign direct investment in the overseas market.
Slide 2.41
Sequential theory (2)
• This particular sequence is sometimes called the

establishment chain, the argument being that
each of these stages marks a progressive
increase in the resource commitment by the firm
to the overseas markets involved.
• There is also a suggestion that as firms move
through these sequential stages, the knowledge
and information base expands and the ‘psychic
distance’ between themselves and the overseas
markets involved contracts, making progression to
the next stage that much easier.
Slide 2.42
Simultaneous theory
• Suggests that customers’ tastes around the world are

becoming progressively homogeneous, e.g. the success
of such global products as Coca-Cola or Sony Walkman.
• The economies of scale and scope available for
standardised products in such global markets are so
substantial that a gradual, sequential approach to
internationalisation is no longer practicable.
• Proponents point to studies which suggest that the global
awareness of brands has fallen dramatically over time,
with less than two years now needed for making
consumers worldwide aware of high profile brand images.
• Critics, however, suggest that sophisticated customers
demand greater customisation.
Slide 2.43
Network theory (1)
• Internationalisation builds on existing

relationships or creates new relationships,
with the focus shifting from the organisational
or economic to the social.
• It is people who make the decisions and take
the actions.
Slide 2.44
Network theory (2)
• Networks can be considered at three levels.

– Macro – external environment is seen as a set of
diverse interests, powers and characteristics. To enter
new markets a firm may have to break old relationships
or add new ones.
– Inter-organisational – firms may well be competitors in
one market, collaborators in another.
– Intra-organisational – relationships within the
organisation may well influence the decision-making
process; e.g. decisions may be taken in overseas
subsidiaries that influence the international involvement
of the parent MNE.
Slide 2.45
Barriers to internationalisation
Rank Classification of barrier Description of barrier
1 Capabilities Inadequate quantity of and/or untrained personnel for

2 Finance Shortage of working capital to finance exports
3 Access Limited information to locate/analyse markets
4 Access Identifying foreign business opportunities
5 Capabilities Lack of managerial time to deal with internationalisation
6 Capabilities Inability to contact potential overseas customers
7 Capabilities Developing new products for foreign markets
8 Business environment Unfamiliar foreign business practices
9 Capabilities Meeting export product quality/standards/specification
10 Access Unfamiliar exporting procedures/paperwork

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Slide 2.

Reasons firms internationalise

Internationalisation methods (1)

Internationalisation methods (2)

Export-based internationalisation (1)

• Indirect exporting: firm operates through

Export-based internationalisation (2)

Export Processing Zones (EPZs)

• Provide incentives for direct exporting

• Permission granted by the proprietary owner

• Franchisee purchases the right to undertake

• Advantages for the franchiser: overseas

• Advantages for the franchisee

Other contractual modes of

• Create a new identity in which both the initiating

Specialised joint ventures

• Each partner brings a specific and different

Shared value-added joint ventures

• Both partners contribute to the same function, i.e.

Critical success factors for joint

• Collaborative relationship which is much less

Figure 2.1 The four ‘Is’ of collaboration

Infeasibility and information asymmetry

• Alliance preferred when:

Investment in options and

• These involve the bringing together of

• Keiretsu: Japanese consortia where 20/25

Foreign direct investment (fdi)

• International investment in ‘real’ items, e.g.

Why invest abroad?

Korea 13.6 20.9 48.4

France 24.6 95.7 118.1

UK 25.7 100.0 100.0

Japan 21.8 84.8 82.4

US 23.7 92.2 116.2

Germany 33.0 128.4 109.7

Hong Kong (China) 16 17.5

Other supply factors and fdi

• Distribution costs: e.g. greater the bulk/weight

Why invest abroad?

Figure 2.2 Evolution of a market-orientated multinational

Other demand factors

• Saturation of home market: e.g. Beer drinking

‘Political’ reasons for fdi

• Avoidance of trade barriers: e.g. Producing

Other demand-related reasons for

• Ownership – specific advantages

• Here the focus is on the assets owned by the

• These theories have mainly sought to answer

• Here the focus is on the costs of entering into a

• John Dunning (1993) concluded that companies will

Sequential theory (1)

• Sometimes called the ‘Uppsala model’ as Johanson

Sequential theory (2)

• This particular sequence is sometimes called the

• Suggests that customers’ tastes around the world are

Network theory (1)

• Internationalisation builds on existing

Network theory (2)

• Networks can be considered at three levels.

1 Capabilities Inadequate quantity of and/or untrained personnel for

3 Access Limited information to locate/analyse markets

4 Access Identifying foreign business opportunities